4.3% growth… now we wait for carbon tax Armageddon

If Armageddon is coming thanks to the carbon tax, then business investment would have tailed off many months ago. All of which makes the recent GDP figures very hard for Tony Abbott to explain.

The carbon tax begins in less than a month. Apparently that means we are on the verge of economic Armageddon. Considering we’ve known since June last year about almost all of the parameters for the carbon tax, you’d think that with such a disastrous economic calamity awaiting us, business would have curtailed investment well in advance. After all, most business investment tends to take several years to pay itself off.  Indeed, in light of the European debt crisis and insipid growth in the US, you’d think that unemployment should be skyrocketing and economic growth ebbing away.

I remember when I first began learning economics at school at the beginning of the 1990s we were in the midst of a global recession (anyone remember 11 per cent unemployment?). At the time it seemed like the goals of macro-economic policy (other than the inflation number) were a distant dream. Taken straight from my textbook at the time, the goals were: inflation – 2-3 per cent; unemployment – below 6 per cent; and annual GDP growth – 3 per cent, good, and 4 per cent or above, brilliant.

Well based on the latest figures from the Australian Bureau of Statistics, inflation is sitting neatly in between 2 and 3 per cent; unemployment, as of today's May data, is 5.1 per cent; and just yesterday we learned that annual GDP growth up to March this year had clocked in at 4.3 per cent.

Of course now the story will start changing from those opposed to the carbon tax. As Tony Abbott so eloquently illustrated the other day, when he said the carbon tax won’t be so much a cobra strike, but rather a python squeeze.

I can start to see the story emerging now:             

‘Sure okay the carbon tax hasn’t led to the end of the world as we know it ….YET. But you know the carbon price will just go up and up and as sure as night follows day so will the electricity price. This will steadily snuff out the economy.’

Now on that point the Australian Energy Market Operator just recently released its Economic Outlook Information Paper prepared by the National Institute of Economic and Industry Research. In it they provide details on how they expect electricity prices to track over the next decade. I’ve provided the charts below illustrating electricity price changes for each state within the National Electricity Market.

Yes, electricity prices are increasing substantially in the first few years in each chart across all states. But then the increases drop dramatically in 2013-14 and actually go into reverse in some states, before then tracking largely in line with inflation out to 2021-22.

Why is that?

Well it’s not because they are assuming that Tony Abbott gets elected and rescinds the carbon tax – that particular scenario isn’t modelled in the charts. Instead they are based on the carbon prices as modelled by Australian Treasury, which assume a carbon price well above most market forecasters. What might help give a hint is that most of the huge hikes in prices occur before the carbon price even starts in 2012-13.

The answer is that 2013-14 is when all the regulator-approved hikes in network expenditure finally come to an end, as well as the costs associated with Victoria’s roll-out of smart meters.

So it looks like that carbon tax python squeeze might instead be a teddy bear hug. 

If you’re upset about electricity prices, don’t bother with screaming ‘axe the tax’ at Parliament House. You’d be far better off banging on the doors of the Australian Energy Market Commission to demand they fix-up regulation of monopoly electricity networks and incentives for reducing peak demand.

Victoria – Annual Growth in Electricity Prices

(dark orange: residential; light orange/yellow: business; light blue: all sectors)

Queensland - – Annual Growth in Electricity Prices

(dark orange: residential; light orange/yellow: business; light blue: all sectors)


New South Wales – Annual Growth in Electricity Prices

(dark orange: residential; light orange/yellow: business; light blue: all sectors)

South Australia - – Annual Growth in Electricity Prices

(dark orange: residential; light orange/yellow: business; light blue: all sectors)

Tasmania – Annual Growth in Electricity Prices

(dark orange: residential; light orange/yellow: business; light blue: all sectors)

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